Preface

It’s no secret that wealthy Chinese are addicted to luxury brand shopping. But the biggest demand for marquee names like Louis Vuitton, Prada and Hermès may not be in the rich coastal cities of Shanghai and Beijing for much longer. Chinese second- and third-tier cities have shown a growing appetite for luxury brands and the top companies are rushing to meet this demand by opening stores in such far-flung locales as Harbin and Urumqi.

According to Bain & Company’s annual China luxury market study, released earlier this month, domestic luxury spending reached $10bn in 2009 — a figure that is expected to jump by 23 per cent this year.

Perhaps most interestingly, however, the report noted that second- and third-tier cities were fast becoming the “new battleground” for luxury brands. Indeed, spending among the richest residents in these cities surged in 2009. The study found that families here making over $180,000 annually spent an average of $28,000 on luxury goods for the year-more than residents in the same income bracket in Shanghai, Beijing and Shenzhen.

Why the shift in spending patterns across the country? For one, wealthy Chinese in the country’s biggest cities tend to do their shopping overseas, where prices are generally lower and the selection better. Also, these consumers are developing more sophisticated tastes, increasingly preferring the harder-to-get Diane von Furstenberg to Louis Vuitton.

“The brands know that in some ways it’s old hat to have an LV bag, so going to second- and third-tier markets is what they have to do,” says Avery Booker, the New York-based editor of jingdaily.com, a website that covers the luxury industry in China, “Even brands you wouldn’t expect like Bottega Veneta are going to Chengdu.”

But with greater expansion comes the risk of brand dilution outside the main cities, as well. Some companies are trying to prevent this by creating special lines in conjunction with famous Chinese artists to generate buzz and maintain their edge in exclusivity.

Earlier this year, for instance, Ferragamo launched a line of bags and T-shirts designed by the artist Xue Song, while the watchmaker Titoni unveiled a “Panda” watch for the Chinese market based on a painting of a panda by Zhang Qikai.

“Five years ago, everyone was selling in China what they were selling everywhere else, and frequently China was behind the other markets,” says Ben Cavender, a senior analyst with the China Market Research Group in Shanghai. “Chinese consumers are very demanding. They want to feel like they’re getting the newest thing or the best thing and brands are needing to cater to that.”

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